The report (pdf) said the Mahdi Army had eclipsed al-Qaida in Iraq in presenting "the greatest negative effect on the security situation".

Despite US pressure, the Iraqi prime minister, Nuri al-Maliki, has been reluctant to confront Mr Sadr because he relies on the backing of the cleric's supporters in parliament and government.

The Pentagon's bleak assessment, covering the period from early August to November, also reported the highest level of attacks against Iraqis and US forces since the Pentagon began issuing the quarterly reports last year.

It said the Iraqi government's efforts at national reconciliation had been unsuccessful.

The report's release coincided with the swearing in of Robert Gates as the new US defence secretary.

Mr Gates, who replaces Donald Rumsfeld, has warned that failure in Iraq would be a "calamity" that would haunt the US for years. He said he would travel to the country for talks with commanders soon.

The defence secretary is expected to have a decisive say in George Bush's "new" strategy on Iraq. The strategy will be unveiled early in the new year amid a flurry of proposals and reviews including the Iraq Study Group's findings.

As Mr Bush weighs his options, the Washington Post has reported a split over the idea of a temporary increase in troops for Iraq. White House officials are strongly in favour of the plan despite the unanimous disagreement of the joint chiefs of staff.

According to the paper, the Pentagon has warned that a modest increase in numbers could lead to more attacks by al-Qaida, provide more targets for Sunni insurgents and boost jihadist appeals for more foreign fighters to come to Iraq to attack US troops.

The joint chiefs also argue that Shia militias could hold back and wait until the troops were withdrawn to retake the streets of Baghdad and other cities.

John Abizaid, the commander of US forces in the Middle East, has gone on record as saying that an increase would be counterproductive because Iraqis resent the presence of foreign forces.

Meanwhile, the Pentagon report - entitled Measuring Stability and Security in Iraq - provided details of the worsening situation in the country. While noting attempts at reconciliation by Mr Maliki, it said: "This project has shown little progress.

"Sectarian violence has steadily increased, despite meetings among religious and tribal leaders. The proposed meeting between political leaders has been repeatedly delayed. Concrete actions by the government of Iraq to implement national reconciliation have not been successful."

"Competition between sects and ethnic political groups for economic and political power has become a dominant feature of the political landscape."

The report found an average of almost 960 attacks against US troops and Iraqis every week during August to November, a 22% increase from the previous three-month period.

Meanwhile, the number of deaths from sectarian killings reached 1,028 in October, less than the July peak but well over the 180 "executions" recorded in January.